By Chris Heisten, CRPC®, CFP®, CSRIC®
What does your dream of financial independence look like? For most, it’s living a life where work becomes optional rather than a daily necessity. But many people mistakenly assume that it can only be achieved in retirement. As President and Founder of Heisten Financial, I’m striving for financial independence by age 55, and I want to help my clients do the same. Here are the 5 financial pillars I live by to help me on my journey toward financial independence.
Make Your Income Work for You
What separates the average person from the ultra-rich person? In some cases, it’s a winning lottery ticket or inherited wealth, but in a lot of other cases, it’s time management, perseverance, and making the most of what you have. Since I haven’t won the lottery, I take active steps to improve my financial situation by ensuring my income and my time are always working for me.
What are you doing in your spare time and how are you managing your active income? Are there more efficient ways to pursue financial independence than just socking away money in a savings account or 401(k)? For some, this might mean actively pursuing other streams of income, like real estate or building a new business in your downtime. Consider tracking your free time and/or excess cash flow to assess if they could be used in better ways.
For instance, downtime could be spent flipping a house or doing freelance work, while extra cash could be used to become a silent partner in a business. All these options have the potential to produce additional streams of income that could be used to fast-track your journey to financial independence.
Be Twice As Rich by Desiring Half As Much
In life, we have needs and we have wants. Understanding the difference and practicing delayed gratification can help you reach financial independence faster and enjoy the journey along the way.
I need to eat to live and I need a roof over my head to sleep, but I want a 1965 convertible GTO that goes for $80,000. When making financial decisions about needs and wants, I always ask myself what reward I will get for fulfilling a want. Most of the time, it’s quick gratification—and it usually doesn’t last. I could buy the 65 GTO and bask in its glory…until I drive it off the lot and realize it’s a depreciating asset.
Now imagine an individual who makes $100,000 per year in W-2 income. He or she will pay roughly $25,000 to Uncle Sam and $50,000 will go to needs. That leaves $25,000 left over for wants. Where do you see the best use of your time and earning power with that $25,000? Should it go toward slowly paying off my GTO, or should it be invested where it has the potential to grow into a supplemental source of income? If you choose investing over other wants year after year, you could eventually earn enough money from those accounts to pay for the majority of your needs without a paycheck.
Automate Your Savings and Investment Accounts
The best advice I’ve ever heard is to pay yourself first. After all, you are the one who worked hard for that money, wouldn’t you rather put it in accounts that will grow your wealth than spend it on frivolous wants? Make this step even easier by automating the contributions to your savings and investment accounts. With the world of technology at our fingertips, direct deposit and auto transfers can be set up easily from a smart device.
Make sure you are paying yourself first before you decide to spend on your wants. After a few months of automated savings, you won’t even miss those extra funds that are no longer being spent on wants or sitting in idle cash. With compounded interest and discipline, you can see growth over time.
Working with a financial advisor is a great way to determine which types of accounts you should fund first. This is something we help clients navigate through custom financial planning. To learn more about our financial planning process, click here.
Invest in Passive Income
Similar to step 1, which focused on investing your extra time, this step focuses on investing your extra money in sources of passive income. That could be anything from real estate to investments that produce a steady cash flow. If you’re interested in something like real estate, make sure you understand the different types of investing available to you.
You can be an active investor in a physical property, like owning and managing a duplex, for instance. Or you could be a silent partner in a venture where you are only contributing capital and not your time or management expertise. The right choice will depend on how much time and energy you want to dedicate. Remember what your time is worth and your earning potential. Personally, I prefer to be a silent owner rather than an operator in a secondary venture.
Avoid Bad Debt
Debt is a divisive topic. There are many people who say that all debt is bad debt and that your priority should always be to pay it off as quickly as possible. Others will say that as long as you are making on-time payments and can afford to do so, there’s nothing wrong with debt.
I have a rule of thumb that I live by to make sure that if I do have debt, I am managing it as efficiently as possible.
If you think you can earn more in an investment than your outstanding debt interest rate, then I suggest leaning into the investment. For instance, imagine you are trying to decide between paying off your house with a mortgage rate of 2.75% or investing your extra cash in an investment that could yield 7% over time. Understanding that there could be some ups and downs with the investment and that no return is ever guaranteed, I would still choose the investment over paying off the mortgage.
Now, if you had something like a credit card with an 18% interest rate, I would prioritize paying down the debt rather than investing. Looking at the opportunity cost (or missed investment opportunity) of your decisions about debt can help use your cash flow in the most efficient way possible.
One Step Closer to Financial Independence
These are just 5 principles I choose to live by as I continue my own journey toward financial independence. Each person’s situation is unique when it comes to how they think about money and the emotions tied to it. That being said, making simple changes and following through with discipline is often the first step toward reaching financial independence. Partner with us to establish your customized financial strategy by emailing firstname.lastname@example.org or calling 907.222.6270 or schedule a complimentary assessment today!
Chris Heisten is President and Founder of Heisten Financial LLC, a fee based boutique financial planning firm with the focus of giving clients back their time so they can spend it doing what’s most important to them. Acting as a true fiduciary for his clients, Chris aims to solve their financial pain points and move them toward financial freedom. In the financial industry since 2007, Chris partners with business owners and oil workers on their journey through life, striving to instill calmness and a sense of direction as he simplifies the complex. He loves nothing more than seeing clients experience relief when they achieve what they thought was impossible.
Chris graduated from the University of Maine, where he played hockey on a scholarship, and retired from professional hockey in 2007. In the community, he remains engaged serving as a youth hockey coach. Chris holds the CERTIFIED FINANCIAL PLANNER™, Chartered Retirement Planning Counselor℠, and Chartered SRI Counselor™ designations. Outside of the office, he enjoys trying new food and wine, reading, traveling, playing golf and hockey, fat tire biking, and donating to local charities. His passions include being a husband and dad, lake life with the family, watching his son and daughter play sports, and spending time with his wife. To learn more about Chris, connect with him on LinkedIn.